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Remortgage to pay debt

Last updated on 22nd January 2024 by Martin Alexander

A remortgage to pay debt can be used to make your debt more manageable. Furthermore, you can reduce your monthly mortgage cost by switching deals. If you’re still on your original mortgage deal, you may be paying over the odds, which can add to your debt issues. This is because mortgages will switch to a standard variable rate (SVR) once your initial period expires.

You may also be able to consolidate your debt. Remortgaging for debt consolidation is a simple yet effective way to minimise monthly payments and save money.

How can I pay my debts by remortgaging?

A remortgage can help you to pay your debt in the following ways:

  • Release equity in your home to help pay your debt
  • Switch to a cheaper mortgage, saving money each month
  • Savings can then be paid towards clearing your debt

How does a remortgage work?

When you remortgage, you switch your existing mortgage deal to a new one. Typically, this involves changing lenders and mortgage deals. In doing so, you can release equity in your home, which can then be used to clear any debts you owe.

A remortgage is based on the following:

  • The value of your home
  • The amount of equity you have
  • Your credit score
  • The amount you wish to borrow

Can I remortgage to pay my debt?

You may qualify for a remortgage to pay off your debt, but this doesn’t mean it’s the right option. It’s essential to consider your financial options, as remortgaging may not be the best choice for everyone. We’ve explained the key areas to consider below.

Having enough equity to remortgage

You can only remortgage to pay a debt if you have enough equity in your property. Even with enough equity, it’s crucial to consider all options before remortgaging.

A remortgage could prove costly if your current mortgage is still at around 85% of the property’s value. Let’s consider the amounts you can consolidate and whether it’s viable.

The example below shows how a maximum consolidation amount is calculated:

  • Remortgage LTV: 90%
  • Current property value: £200,000
  • Outstanding mortgage amount: £165,000
  • Remortgage amount: £180,000
  • Maximum consolidation amount: £15,000

Is further borrowing allowed with your current mortgage deal?

Your current mortgage deal may or may not allow further borrowing. If it doesn’t, you must approach a new lender to remortgage.

Check the costs and fees involved if your current mortgage allows further borrowing. Any fees incurred for further borrowing will often be added to the original loan amount. Borrowing more will increase your overall debt, so switching lenders may be a better option.

Does your mortgage term enable you to remortgage now?

You will likely incur early repayment charges if you’re still on a fixed-term mortgage. Be sure to check with your lender for these charges if you remortgage earlier than anticipated.

If your initial mortgage term has expired, the chances are your current mortgage rates will be higher than average. This alone could be one reason to remortgage, as there may be lower rates you can switch to, saving you money each month. Don’t forget to check the costs of taking on a new mortgage.

What is debt consolidation?

Debt consolidation is when multiple debts are merged into a single debt. The aim of consolidating debt is to make your debt more manageable and to reduce the amount you pay each month. Debt can be in the form of loans, finance or unpaid credit cards.

Rather than managing multiple bills throughout the month, debt consolidation allows you to focus on one monthly payment.

Should I consolidate my debts?

Debt consolidation is advised on:

  • Your debt amount
  • The number of creditors you’re in debt with
  • The levels of interest your debt has

If most of your debt is related to credit cards, then debt consolidation may be something to consider. This is because credit cards often have higher interest rates and are expensive to borrow money. Debt consolidation only works if you stick to the plan and don’t rack up new debt.

Debt consolidation is certainly not an easy way out. Consolidating debt should be used as a last resort as you need to assess the benefits and possible pitfalls you may encounter.

Can I remortgage to consolidate debt?

Applying for a remortgage to pay off debt is similar to applying for other mortgages. The lender will conduct a credit check and an affordability assessment.

It’s worth mentioning that each lender has its criteria when making assessments. Some lenders require a clean credit history, whereas others may approve mortgages with bad credit.

The way affordability is calculated also varies with most lenders. The general rule is that lenders will lend up to four times your annual income. This amount can be slightly more or less depending on additional circumstances. Your mortgage advisor will be able to explain this in greater detail and match you to the best-suited lender based on your financial profile.

Should I remortgage to pay debt?

With mortgages, there’s no shortage of choices. The market is packed full of products with ever-changing rates and offers. So, how can you be sure you’re making the right choice? Always balance the positives with the negatives to find the right deal and if remortgaging will be beneficial to helping you clear your debt.

Benefits of remortgaging to pay off debt

The major benefit of remortgaging to clear debt is that your monthly payments will be lower. Mortgages are loans that are repaid over a period of time. The time to repay the loan is usually a lot longer than any other financial arrangement, such as credit card balances and personal loans.

Because the debt is repaid over such an extended period, monthly payments are much smaller and easier to manage. If you had a £ 12,000 loan with a term of 2 years and a 10% interest rate, your monthly payment would be around £550, assuming no other fees were attached.

If the same loan of £12,000 were paid back through a 15-year mortgage with an interest rate of 5%, your monthly payment would be around £70. Even if the interest rate were the same at 10%, your monthly payment would be in the region of £75.

The risks of remortgaging to pay debt

It’s important to note that although your monthly payments will be lower, you will pay more interest on your loan for the duration of your term. This is because rather than paying your loan back in five years, you may choose to pay it back over twenty years. By doing this, you’ll be paying interest for an additional fifteen years. So yes, your monthly payments will be lower, but you’ll pay more overall.

Remortgaging to consolidate debt will place your home at risk, as your unsecured loans are secured against your property. If you fail to repay your debt, your home will be used as collateral. For this reason alone, we’d only advise debt consolidation remortgages as a last resort.

If you take this option, you will need strict financial discipline to meet repayments. Your home will also be at risk throughout your mortgage term.

Alternatives to remortgaging

A remortgage to clear debt will often be the cheapest option you have. If you’ve considered this option or it’s impossible due to your current lender’s terms, you could use a secured loan to consolidate your debt.

Secured loans

Secured loans often have higher rates than mortgages. That said, a secured loan can still be repaid over a long period, similar to a mortgage. This enables you to spread the repayment cost over an extended time, resulting in smaller monthly payments.

You could also use unsecured loans rather than remortgage to pay off debt. That said, rates for unsecured loans will usually be very high. This is because the loan is unsecured, and the lender is taking a risk. Lenders that provide unsecured loans minimise their risk by charging higher interest rates.

Unsecured loans usually have shorter repayment periods. This means that higher amounts of debt usually result in higher monthly repayments than mortgages or secured loans.

Learn more: Should I remortgage or use a secured loan?

Can I clear my credit card debt by remortgaging?

If you’re financially stable enough to repay your unsecured debts, such as credit card bills, it’s highly recommended that you continue paying your bills as you are. However, it may be wise to overpay if it’s viable for you to do so. Also, be sure to check your financial agreements and whether or not overpaying is permitted.

Repaying your debt without having to remortgage is probably best overall for the long term. It won’t be easy in the short term as you’re constantly paying out but think of the bigger picture. Your debt will always grow if you pay back the minimum amount necessary for your credit cards. Ensure you’re paying back the balance and any interest incurred.

If the bulk of your debt is from credit cards, you may be able to transfer the balance to another credit card. This allows you to share the balance with a credit card at a lower interest rate. Some credit cards even have interest-free periods for new customers. This can enable you to reduce your monthly payments, save more, and pay off more debt.

Only remortgage to consolidate your debt as a last resort. You can view current remortgage rates here, and if you’re still unsure, you can speak to an advisor.

Read more: Can I get a mortgage with credit card debt?

Conclusion: Should I remortgage?

If you want to spend more, using a remortgage for debt consolidation is the last thing you want to do. In all honesty, you’ll suffer in the long term by doing this, as you’ll probably generate even more debt.

Sometimes, falling into debt may have been a result of unforeseen events. You can’t change the past, but you can attempt to change your future. Strong financial discipline is necessary, so do your best to avoid spending where you don’t need to. If your debt has spiralled out of control, speak to your creditors. You may be entered into a debt management plan, allowing you to get back on track.

Your mortgage lender may also be able to extend your mortgage term, allowing for monthly payments to become smaller. Your creditors that you owe may also allow for payment plans to be set up. A plan is vital in clearing your debt, so consider such options before applying.

About the author

Martin Alexander
Senior Mortgage Advisor

Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.